Traders boost BoE and ECB rate hike bets as oil nears $85

The collapse of the U.S.-Iran ceasefire has sent oil prices surging to one-month highs, reigniting inflation concerns across Europe and prompting traders to increase bets on interest rate hikes by the Bank of England and the European Central Bank.

Brent crude climbed toward $85 a barrel on Tuesday, extending a rally that began after President Donald Trump declared the Iran ceasefire "over" on July 8. The United States has since reinstated its naval blockade of Iran and both countries have escalated military action around the Strait of Hormuz, one of the world's most critical oil shipping routes.apnews+3

Markets Reprice Rate Expectations

Interest rate traders are ramping up bets that both the Bank of England and the ECB will raise rates, driven by the surge in oil prices and its potential to reignite inflation. The shift marks a reversal from late June, when a brief U.S.-Iran peace deal had eased pressure on central banks and pushed rate hike odds sharply lower.investing+2

Markets had priced just a 25% chance of a Bank of England hike in July and only one rate increase for the year after the June 17 ceasefire agreement brought oil prices down. Now, with Brent having risen roughly 20% from its post-ceasefire lows, those calculations are being rapidly revised.fxstreet+1

The ECB, which raised rates by 25 basis points to 2.25% on June 11 in its first hike since 2023, is next set to meet on July 23. Reuters reported in late June that a September hike remained the most likely scenario, though officials noted oil prices rebounding could accelerate the timeline.reuters+3

Treasury Yields and Fed Expectations

The escalation is also reverberating through U.S. bond markets. The yield on the 10-year Treasury note rose more than 4 basis points to 4.614% on Monday as the strained ceasefire weighed on sentiment. Bank of America ↘ 1.02% forecasts three quarter-point Fed rate hikes in 2026, the most hawkish call in a recent Reuters survey of primary dealers.reuters+1

CNBC reported that yields had been climbing all week as U.S.-Iran tensions stoked fears of elevated inflation feeding through to the broader economy.cnbc+1

Central Banks Walk a Tightrope

Both the Bank of England and ECB face a delicate balancing act. The BoE has held rates at 3.75% for four consecutive meetings, with its Monetary Policy Committee voting 7-2 to hold at its June 18 meeting. The next decision is scheduled for July 30. BofA Global Research dropped its BoE rate hike forecast in late June, calling it "a close call," but noted that "the risk balance still appears to favor a hike this year due to potential re-escalation risks".youtube+3

ECB policymaker Pierre Wunsch told Reuters in June that if inflation continued spreading beyond energy sectors, "maybe you want to hike another 25 basis points to be on the safe side". With crude prices now testing the upper end of analysts' base-case ranges once more, that scenario appears increasingly plausible.reuters+1